Slow And Low On Mortgage Relief

The Obama administration claims it's still on track to help some 4 million troubled mortgage borrowers over the next three years by reworking the terms of their loans, but some analysts are skeptical.

Moodys expects the Home Affordable Modification Program to help only half as many people as the government hopes. And even then Moodys analyst Celia Chen thinks the figure may be difficult to achieve. Writing in a recent note, Chen said that the number of modifications "will have to step up substantially in the remainder of this year in order" to hit the 1.5 million to 2 million modifications that her firm estimates can be completed under HAMP by 2012. (See "Suppose They Gave Mortgage Relief But Nobody Came.")

The Treasury Department acknowledges that servicers need to ramp up their workout activity in order to hit a November goal of 500,000 loan modifications, but officials insist that even with just 235,000 trial workouts made, initial goals for the program could still be met. (See "Weak Progress On Loan Modifications.")

Despite that, Chens outlook remains decidedly dour. Even when "HAMP is running smoothly," Chen says, "rising negative equity and increasing job losses will make it impossible to halt the tidal wave this year, placing continued downward pressure on house prices."

The rise in loan defaults has been driven by a drop in home values to below what many borrowers owe on their mortgages. Moodys estimates that home values will fall another six to seven percentage points, bringing prices down 39% from their peak in 2006. But even that projection is hinged on the Obama loan push lowering defaults to some degree, albeit less than government estimates. The efficacy of the loan modification portion of this plan is the linchpin to our house price outlook, writes Chen.

According to Equifax, the number of borrowers 120 days or more delinquent on their first mortgages increased at an annualized pace of 166% in the second quarter of 2009 compared to the first, meaning that many more foreclosures are in the pipeline.

In July, the number of foreclosure filings jumped 7% from the month before. "The increase is disappointing given intensified modification efforts and relatively more stable economic conditions," wrote analyst Ivy Zelman of Zelman & Associates.

A further issue is whether the modifications are enough to keep homeowners' heads above water, or whether they slide back into default. To the extent that future modifications help to reduce the default rate, as opposed to just postponing defaults, the lifetime losses could be lower than our projections, said Amita Shrivastava, an analyst at Moodys.